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Aspects of Contract and Negligence for Business 2012

TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 2 PART 1 The essential elements required for formation a valid contract ..................................... 3 1. Agreement ............................................................................................................................... 3 1.1 Offer .................................................................................................................................. 3 1.2 Acceptance ........................................................................................................................ 4 2. Consideration .......................................................................................................................... 5 2.1 Adequacy and Sufficiency of consideration ..................................................................... 5 2.2 Privity of contract ............................................................................................................. 5 3. Intention to create legal relations ............................................................................................ 6 3.1 Domestic arrangement ...................................................................................................... 6 3.2 Commercial agreement ..................................................................................................... 6 3.3 Capacity ............................................................................................................................ 7 PART 2 The impact of different types of contract ...................................................................... 8 1. Verbal contract ........................................................................................................................ 8 2. Written contract ...................................................................................................................... 8 The parol evidence rule ........................................................................................................... 8 3. Implied contract ...................................................................................................................... 9 PART 3 The effect and meaning of different terms of contract ................................................ 10 1. Condition............................................................................................................................... 10 2. Warranty ............................................................................................................................... 10 3. Implied term .......................................................................................................................... 11 CONCLUTION............................................................................................................................. 12 REFERENCE ................................................................................................................................ 13

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012 INTRODUCTION


The assignment is the presentation about the knowledge and understanding about Aspects of Contract and Negligence for Business subjects of student. The assignment is divided into three main parts. The first part discusses about the essential elements of a valid contract, the second part discuss the impact of different types of contract and the last one demonstrates the theories applications of these term of contract in given business situation. This assignment will help student link theory to practice by applying in typical examples. It is assessed by Mr. John Andre teacher of Aspects of Contract and Negligence for Business subjects at ITP Banking Academy

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012 PART 1 The essential elements required for formation a valid contract
A contract is defined as an agreement which legally binds the parties (Business Law, 2010). A valid contract cannot be formed without these essentials elements: agreement, consideration, intention to create a legal relationship and capacity. 1. Agreement Agreement is basically reached through offer and acceptance. One party makes an offer and another party accept to create a binding contract. 1.1 Offer Offer and acceptance are the first requirements that a contract must to have to identify the validity. The elements are used to determine whether an acceptance exist between the offeror and the offeree. The offer needs to be understood in the proper sense so it has to be specific to prevent a mistake. If an offer is not clear, the acceptance will be invalid and no contract has been made. For example, Colin and Shields hide merchants in London, offer Mr. Hartog Dutch furrier to buy their Argentina hare skin with the price 30,000 skins at 10d per piece; Mr Hartog orally agreed. Finally, Collin and Shields wrote in written offer, they would buy the amount of hare skin with the price 30,000 skins at 10d per pound. It was only a third of the price offer previously. Mr. Hartog wanted this price and Colin v. Shield denied any binding contract was created. The judge decided that there was no any contract. The form of offer contained a mistake. Hare skins were generally sold per piece and Mr. Hartog realized that skins sold per pound would make advantage for him (Hartog v Colin & Shields, 1939) An invitation to treat needs to be distingue from an offer. Invitation to treat is an indication of the preparation to receive offer with the view to forming a binding contract (Business Law, 2010). An offer can be accepted to create a binding contract, but invitation to treat. Invitation to treat can be auction sales, advertisements, exhibition of goods for sale and an invitation for tender. Advertisement and exhibition of goods for sales are the suggestion for customer to make offers to purchase. For example, in the scenario, EZ Kooking sells new and used kitchen devices such

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012


as rice cooker or blender in its store, customers would come and make offer to purchase for what they want. However, an advertisement is published to a large amount of people which enclosing a reward can be seen as a unilateral offer without requirement of offerees communication (Carlill v Carbolic Smoke Ball Co, 1893). In scenario, Mr. Jones, the owner of EZ Kooking, promised in the radio to refund 50% of product for late delivery which is the same as the case Carlill v Carbolic Smoke Ball Co. It is a unilateral contract, so if anyone is able to fulfill the necessary condition, the contract is binding.

1.2 Acceptance Acceptance is an unqualified agreement to the term of the offer (Business Law, 2010). Acceptance can be expressed by action or words or inferred by conduct. However, acceptance must follow these several rules: The agreement must be clear and certain: The acceptance must match the term of the offer, if appears two offers in term, it said that there is no contract (Tinn v Hoffman & Co, 1873). Besides, the offer must be reasonable and determined objective. If offer was too vague, the contract could not be enforced (Cammell Ltd v Ouston, 1941) Acceptance must be by the person to whom the offer is made It means the offeree must direct or indirect show the acceptance to the offeror. The silence does not represent for the acceptance, acceptance must be replied. Therefore, to indicate the acceptance, the offeree must express it by words or action or through conduct as the case Carlill v Carbolic Smoke Ball Co in 1893. However, in the case which two parties frequently negotiate about the contract, its hard to classify which was offer and which was acceptance. The court would examine the cases circumstance to decide whether agreement was reached or not (Butler Machine Tool v Ex-Cell-O Corporation, 1979)

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012


2. Consideration Consideration consists in some right, interest, profit or benefits accruing to one party to the contract, or some forbearance, detriment, loss or responsibilities given, suffered or undertaken by the other (Business Law, 2010). Simply, consideration is a bargaining of promisor and promisee. Each of them will receive a benefit and suffer a detriment. No contract can binding without consideration. 2.1 Adequacy and Sufficiency of consideration Consideration must be sufficiency but no need to adequacy. It means consideration must provide benefit and suffer detriment but it is not really worth high value. Because of the freedom of contract, the parties can decide the price by themselves. (Thomas v Thomas, 1842) 2.2 Privity of contract If claimant is not an original party in a contract, he gets no right to sue on it. For example, the case Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd, Dunlop was wholesaler and its agency was Dew & Co, Dunlop had contract through Dew & Co with Selfridge. But Selfridge sold tyres with a price different to the maintenance term. Then Dunlop sued Selfridge for breach of contract, but the promise in term of contract was made by Selfridge for Dew & Co. So Dunlop cannot enforce the contract (Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd, 1915) However, other law is The Married Womens Status Act 1957 said that the contract formed by a married person must refer the benefits for the spouse. It means husband or wife of the individual is binding in the contract can enforce the contract (Married Women's Status Act 1957). It also a rule of privity of contract In the case EZ Kooking v Cassidy in scenario, the owner is being sued by a customers wife, Mrs. Cassidy because late delivery while he promised in radio that he would refund for customers for any product bought during December and January not delivered on or before the written Delivery Date. Because Mrs. Cassidy is the buyers wife, so she can sue the owner for the refund.

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012


3. Intention to create legal relations It can be defined as follow: An agreement will only become a legally binding contract if the parties intend this to be so. This will be strong presumed in the case of business agreement but presumed otherwise if the agreement is of a friend, social or domestic nature (Business Law, 2010) 3.1 Domestic arrangement Domestic arrangement is an agreement between husband and wife and presumed that there is no intention to create legal relations. However, husband and wife can enter into a binding contract in case they appeared to intend to be bound by law. In case Merritt v Merritt, the husband left his wife. They did make an arrangement. The husband agreed to pay 40 per month and the wife agreed to pay the mortgage. The house must to be transferred into the wifes name when she paid off the mortgage. The husband signed the paper. However, he refused to transfer the house after the wife paid off the entire mortgage. (Merritt v Merritt, 1970). This is a separated arrangement; therefore they appeared to intend to be bound by law. The husband must to transfer the house to the wife because the he signed a note as written evidence. 3.2 Commercial agreement There is a commercial agreement between businessmen if its presumed that they intend to be bound by law. For example, Esso promoted that who bought four gallons of petro would get a free coin of their World Cup Collection. However, according to the Purchase Tax Act 1963 (UK), the coins were produced in quantity for general resale, Esso had to pay tax. Esso argued that the coins just were free gift for promotion. (Esso Petroleum v Customs & Excise , 1976) The court held that Esso would intend to enter into legal relation when they offered the coin in a commercial context to raise their sales of petro; and the coins werent exchanged for a money consideration but it were entry into a commercial contract to buy petrol.

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012


3.3 Capacity Capacity of contract refers the legal competence of some groups to enter into a binding contract. Minor is one of the group cannot enter into a binding contract because the unfulfilled understanding and awareness about the contract law. However, there are some types of contract that minor can enter to make a valid contract Minor should pay for their necessaries as foods, clothes and goods/service which provide for them the basic living standard (The Sale of Goods Act , 1979). Necessaries can be assessed in each minors circumstances. For example, a wife (minor) refused to pay for the funeral of her husband because of the incapacity to pay as a minor, but the court judged that it was a necessary which she must pay because of the obligation to her husband (Chapple v Cooper , 1844). In the scenario, approximately 10% of Mr. Joness customers are minor. Though it depends on individuals situations, kitchen devices generally are not necessaries. Because kitchen devices just support to minors a better living standard but a vital element in their life. Minor can eat canned food, go to restaurant or have somebody to cook for them. They no need to use such a kind of device to survive. Therefore, minor is unable to binding contract with EZ Kooking. The owner cannot enforce a contract with them.

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012 PART 2 The impact of different types of contract
There are three types of contract: Verbal (oral) contract, written contract and implied contract. 1. Verbal contract In verbal contract, two parties create a binding contract by words so it need to be clear and avoided to misunderstanding between two parties. Furthermore, agreement depends on the attitude and faith of two parties. If one of them revokes, itll hard to prove what is right, what is wrong. Verbal contract can have can be support by writing evidence such as letter, email, text (ANDRE, John, 2012) For example, a company orally discussed with a customer about the terms for the provision of services for the contract. In the draft documents passed between them, there was a clause entitling customer terminate the contract in three months notice. But before create a written contract, company did begin provide service for customer. Then customer terminated the contract and the company refused the termination. The held decided the company cannot sue because of the written evidence supported for the oral contract. (BVM Management v Roger Yeomans, 2011) 2. Written contract Written contract is the most trusted type of contract. Written contract is a printed document which collects signs of both parties. It is an evidence of the arrangement between two parties as well as an action to protect both sides from breach of contract. Consumer credit contract and transferring of share or to land must be in written (The Law Commissions Act 1965) The parol evidence rule When contract is writing, all necessary term are presented; it is referred to the written document only. Written contract must be only modified by writing, oral evidence cannot be added, varied or contradicted to the written term. Its called the parol evidence rule. The typical case follow the parol evidence rule is Hawrisk v Bank of Montreal in 1969. In this case, a solicitor signed a guarantee with a bank that the solicitor can had interest from a companys liabilities of buying the asset of a second company. The banks assistant manager oral assurance that guarantee would be released after a joint guarantee was received from the company. Then Nguyen Kim Ngan Gin | F04A - 119 8

Aspects of Contract and Negligence for Business 2012


the company is insolvent; the latter guarantee was obtained but the solicitor's was not released. The solicitor sued and gave evidence when the guarantee was given. The court refused his oral evidence. There was no collateral agreement because it contradicts the term of the guarantee bond. (Hawrish v Bank of Montreal, 1969) Back to the case of EZ Kooking v Cassidy, her husband signed a contract to buy a rice cooker that includes a clause The undersigned agrees that all products are purchased and that there is no warranty other than that provided by the manufacturer. If the manufacturer does not include a warranty then the items are without any warranty. It means if in the moment the husband was buying the rice cooker, manufacturer did not warranty, there would have been no warranty. The promise in radio isnt counted as oral evidence adds to written contract. Therefore, the wife cannot get money from Mr. Jones. 3. Implied contract Implied contract is created without the communication between the parties; there is no oral or written agreement between them. For example, the case Clarke v Dunraven (1897), two parties entered to a regatta, they signed a contract that they obeyed to pay for damages caused by fouling. It means there is an implied contract created between both of them. (Clarke v Dunraven, 1897) Implied contract can be unilateral contract; one party can give unilateral offer without communication to offeree such as the case Carlill v Carbolic Smoke Ball Co.

Nguyen Kim Ngan Gin | F04A - 119

Aspects of Contract and Negligence for Business 2012 PART 3 The effect and meaning of different terms of contract
1. Condition Conditions are terms that going to the root of a contract (Business Law, 2010). Condition is done by two parties entering into the contract. If a party breaches the condition, the contract cannot continue the other party can claim damages or end the contract. For example, in the case Associated Newspapers Ltd v Bancks in 1955, Bancks provided a drawing for Associated Newspapers (AN) and they would publish his drawing in the first page of the comic section in the newspaper. AN agreed but in the third publishing, they put Banckss picture in page three. Bancks sued AN for breach of condition and end the contract. The court held decided that the condition in the contract is Banckss picture appeared in the first page and AN breached the condition. Bancks can sue for damages (Associated Newspapers Ltd v Bancks, 1955 ) In the case EZ Kooking v Smith, the condition of contract is EZ Kooking give Smith the right to use the refrigerator in one year and Smith pay EZ Kooking 50 per month. If EZ Kooking withdraws the machine before the contract end or Smith doesnt pay fee, the other party can sued for damage or terminate the contract. 2. Warranty Warranty is an inessential term of contract. It is subsidiary to the main purpose of the agreement (Business Law, 2010). Breach of warranty entitles the innocent party the right to claim damages but cannot terminate the contract. For example, an opera singer agreed to perform for a three month period by contract. He was ill and missed some days of rehearsals. The producer fired him and rescinded the contract. The court held that missing the rehearsals would not lead to the root of the contract. Therefore, the singer just breached the warranty; the producer cannot terminate the contract. (Betti v Gye , 1876) Come back to the case EZ Kooking v Smith, EZ Kooking would guarantee the machine work probably in one year. After one month, its ice-maker stops working, instead of refuse to accept it, EZ Kooking has to fix it for the term of contract. Ms. Smith cannot claim EZ Kooking for breach of contract and get the refund for the first month.

Nguyen Kim Ngan Gin | F04A - 119

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Aspects of Contract and Negligence for Business 2012


3. Implied term
Implied term is a term deemed to form part of a contract even though not expressly mention. (Business Law, 2010) Term may be implied by statute or the court. For example, the National Minimum Wage Act 1998 rules the minimum wage is 6.08 per hour for workers, any contract is made between employee and employer must set the salary equal or more than 6.08 per hour. Implied terms are raised by courts when the court believes these terms are strictly necessary to give efficacy to the contract. For example, a city council sued a tenant for breach tenancy contract because she self-willed repair the lifts, stair cases, rubbish chutes of the flats. There was no obligation mention to repair in the term of contract. In fact, there was tenants obligation to maintain but no mention obligation to repair of landlord. The court held that obligation to repair was an implied term in contract, and city council had to respond to maintain the common parts of the flats. (Liverpool City Council v Irwin , 1977) The case EZ Kooking v Smith showed that Ms. Smith gave Mr. Jones 50 per month, Mr. Jones would ensure the refrigerator working for one year. Similar to the case Liverpool City Council v Irwin, there is an implied term that Ms. Smith response to maintain the refrigerator and Mr. Jones has to repair the common parts of refrigerator in case it does not work. Therefore, Mr. Jones has to fix the ice-maker in the refrigerator and Ms. Smith has to respond to keep the refrigerator not being stolen or broken. Therefore, Ms. Smith has to compensate for the stolen refrigerator for EZ Kooking.

Nguyen Kim Ngan Gin | F04A - 119

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Aspects of Contract and Negligence for Business 2012 CONCLUTION


Just a few aspects in a huge amount of knowledge and understanding about business law have been showed in this paper. The assignment is the result of my working and research for a period of time through many resources. Three different parts discussed about different specific topics with the associations of contract law theories and application of given scenario. I think my work in part three is the most proper analysis and application compared with the others but the knowledge about term is not expounded in very detail scheme. Part one and part two are still noticed about theories than application. I expect the next time when Ill have accumulated more knowledge and experience that I can do a deeper and better research about the business law which is a very essential knowledge for my future career.

Nguyen Kim Ngan Gin | F04A - 119

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Aspects of Contract and Negligence for Business 2012


REFERENCE 2010. Business Law. London: BBB House, Aldine. ANDRE, John. 2012. Associated Newspapers Ltd v Bancks [1955 ] HCA 24. Betti v Gye [1876]. Butler Machine Tool v Ex-Cell-O Corporation [1979] 1 WLR 401 Court of Appeal. BVM Management v Roger Yeomans [2011]. Cammell Ltd v Ouston [1941] 1 AC 251. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 Court of Appeal. Chapple v Cooper [1844]. Clarke v Dunraven [1897] AC 59. Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847. Esso Petroleum v Customs & Excise [1976] 1 WLR 1. Hartog v Colin & Shields [1939] 3 All ER 566. Hawrish v Bank of Montreal [1969] SCR 515. Liverpool City Council v Irwin [1977] AC 239 House of Lords. Married Women's Status Act 1957. Houses of the Oireachtas, p.7. Merritt v Merritt [1970]. The Law Commissions Act 1965. London: The House of Commons. The Sale of Goods Act. 1979. Thomas v Thomas [1842]. Tinn v Hoffman & Co [1873] 29 LT 271.

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